Wednesday, March 2, 2011

Surviving A Day Like Tuesday

What happened? Yesterday was the first day of the month, right? Wasn't that supposed to guarantee easy money for everyone who was long?

In my last post, First Trading Day Of The Month - Voodoo Statistics, I warned of the potential for a 22.5 point loss in the S&P on Monday. The S&P actually ended up dropping 20.9 points or -1.6%. Those who hedged themselves to prepare for such a move would have done well yesterday.

Personally I think the drop we had on Feb 22 was the beginning of a more sustained down move in equities. We had a nice bounce late last week. But even as the S&P was bouncing, lots of the market leaders continued to show relative weakness. Names like NFLX and AMZN for example continued to hit new recent lows even as the market bounced.

Other names like GS are just now starting to break down below uptrends that have been in place since last summer.

On Tuesday I added to my S&P shorts in the morning as the markets initially rallied. And initiated short positions in AOL, GSIC and GS.

I covered my natural gas long for flat. I bought natgas via $HNU.TO near the lows last week, rode it all the way up, and all the way back down again. I'm not particularly proud of that trade. I thought that natgas was putting in a floor and had more room to rally, but ignored both Monday's hammer and the support/resistance level put in during the end of December.

Based on the UNG chart above, natural gas confirmed resistance around the 5.50 level and put in a brutal evening star reversal. While fundamentally many of the bullish arguments I made in Natural Gas: Weekly Storage Analysis and More are still valid, the technicals are suggesting it still may too early to commit to a long position here. However I'll be watching for signs to get back in.

I am also short EUR/USD @ around 1.3800 via EUO. This is a bit of a risky play, but I think provides good risk/reward with the massive negative USD sentiment in the market. But I will stop myself out of that position on a move above 1.3900.

For the balance of the week my plan is to remain short equities until something tells me I'm wrong. Initial support in the S&P comes in at 1290/12.95 today with stronger support around 1275. If 1275 gives way then I could see the S&P falling all the way to 1220/1225 before stabilizing.

I will also be keeping an eye on oil prices. A sudden drop in oil prices could cause equities to quickly reverse and move higher (at least in the short term), but as long as we are flirting with triple-digit oil in the current environment I like staying short.

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